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ABB Poised on Solid Traction Across Markets, Risks Remain

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ABB Poised on Solid Traction Across Markets, Risks Remain

ABB's solid market potential for its energy-efficient products and restructuring activities are likely to drive its organic growth. Higher costs pose a concern.

On Aug 14, we issued an updated research report on ABB Ltd ABB.

In the past six months, this Zacks Rank #3 (Hold) stock has lost 11.6% compared with the industry’s decline of 4.4%.

Existing Scenario

ABB is a technology leader in multiple fields including electrification products, robotics and motion, industrial automation and power grids. Also, it caters to clients in utilities, industry and transport & infrastructure across the world. Demand for energy-efficient products is expected to grow in the future as a result of expected rise in energy prices. Also, increasing global investments in power and infrastructure are likely to strengthen the company’s position over the long term. Of late, its businesses in all key operating regions have been witnessing solid improvement.

ABB has been restructuring its business strategically to drive organic growth while minimizing risks and augmenting competitiveness. Notably, the company is progressing well on the third stage of its Next Level Strategy that focuses on three areas, namely profitable growth, relentless execution and business-led collaboration.

Further, in July 2018, it completed the acquisition of GE Industrial Solutions, which will further strengthen its position in Electrification by improving market access in North America. With this buyout, ABB has established a long-term strategic supply relationship with GE to supply it products from across its portfolio. Also, in July 2017, ABB concluded the acquisition of B&R, which is proving to be accretive to earnings. These two buyouts will help accelerate the company’s operational momentum and will be critical in cementing its future competitive position in electrification and automation.

However, rising cost of sales has been a major concern for ABB over the past several quarters. Notably, in the second and first quarter of 2018, the metric recorded an increase of 5.1% and 7.9%, respectively on a year-over-year basis.

Also, the company's policy of acquiring a large number of companies adds to the integration risks. Frequent acquisitions are a distraction for management and can impact organic growth over the long term. Furthermore, ongoing tensions between the United States and China due to the imposition of tariffs on steel and aluminium imports, and on a range of Chinese products are likely to hurt the company’s profitability. Failure of both the countries to resolve their trade differences might hinder ABB’s growth prospects.

Key Picks

Some better-ranked stocks in the same space are Altra Industrial Motion Corp. AIMC, Applied Industrial Technologies, Inc. AIT and Pentair plc PNR. While Altra Industrial Motion sports a Zacks Rank #1 (Strong Buy), Applied Industrial Technologies and Pentair carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Altra Industrial Motion surpassed the Zacks Consensus Estimate thrice in the trailing four quarters, delivering a positive average earnings surprise of 4.01%.

Applied Industrial Technologies exceeded the Zacks Consensus Estimate in each of the trailing four quarters, with an average positive earnings surprise of 11.78%.

Pentair outpaced the Zacks Consensus Estimate thrice in the trailing four quarters, delivering a positive average earnings surprise of 2.50%.

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